Swift Congressional Action Could Follow Fiduciary Rule

Leaders
of the Insured Retirement Institute expect “swift and significant legislative
reaction” if the Department of Labor’s fiduciary redefinition proposal closely
resembles a preliminary version filed in 2010.

Leading a conference call with reporters, Lee Covington,
senior vice president and general counsel for the Insured Retirement Institute
(IRI), said there is a lot of common ground between investment industry
practitioners and federal regulators heading into 2015.

Both camps have a stated focus on solving retirement issues,
Covington said, especially in the areas of improving access to lifetime income
guarantees through tax-qualified retirement plans and continuing the uptake of
automatic plan enrollment and deferral escalation features codified by the
Pension Protection Act. However, key points of contention remain between
lawmakers and investment service providers working with retail and retirement
plan investors, according to the IRI, especially when it comes to the tax
treatment of retirement plans and the fiduciary nature of different forms of
investment advice.

Covington’s comments were made in anticipation of President
Obama’s annual State of the Union address. He said the IRI expects Obama
to directly address retirement security issues in this year’s State of the
Union, and that the advocacy group is generally optimistic about the chances
for investment industry and regulatory professionals to come together on
concrete steps to improve American workers’ retirement security in 2015.

Besides the potential for tax reform to diminish the
favorable tax treatment of qualified retirement plan investments, one area of
uncertainty and disagreement remains the Department of Labor’s (DOL) pending
fiduciary redefinition, now referred to by the DOL as the “conflict of interest
rule.” The DOL has maintained that it will release
the rule sometime near the end January or shortly thereafter, though
this timing increasingly seems tenuous, Covington said, given substantial
vetting requirements of the Office of Management and Budget, which has
reportedly not yet started its mandatory review of rule language from the DOL.

The DOL first proposed the fiduciary redefinition circa
October 2010, leading to significant
industry backlash claiming the proposed rule was too broad and would
disrupt established business practices of financial advice and investment
institutions interacting with employee benefit plans. In short, the original
rule would have significantly widened the class of investment professionals and
firms defined as fiduciary investment advisers, Covington explained.

Then
as today, many investment services providers claimed a stronger fiduciary rule
will do more harm than good, potentially cutting off advice access for less
affluent investors. The DOL challenges this assessment, citing the importance
of rooting out conflicts of interest in all parts of the investment advice
industry.

Covington said the IRI takes the position that any new
fiduciary definition could be harmfully disruptive if not structured
appropriately. “If the rule looks like it originally did, and that’s a big if,
we think that it’s very likely we will see swift and significant Congressional
reaction moving to oppose it.”

Speaking with PLANADVISER after the call, Covington said
there are a number of actions that Congress could take to attempt to blunt the
impact of a strict new conflict of interest rule. He was quick to warn that
it’s still unclear which path will be taken by the now Republican-controlled
Congress, or if any of these options will even be necessary.

First, Covington said Congress could take an
appropriations-based approach, which would put binding language in the DOL’s
funding mechanisms that would prohibit the agency from using any money to move
forward with implementing or enforcing the new rule.

“The second option would be the option outlined in Senator
Orrin Hatch’s well-known bill, which would restore joint jurisdiction over
insured retirement accounts [IRAs] to the U.S. Treasury Department,” Covington
said. “Of course, this would only blunt some of the impact of this for the IRA
segment of the market.”

Covington said the third option would be for Congress to
codify the current five-part test commonly used for identifying fiduciaries
(outlined in a DOL
fact sheet from 2011), “including the exemptions that are contained in
the rule proposal, including the seller’s exception.”

These actions would all most likely require the approval of
President Obama, Covington noted. Conceding that it’s usually unlikely for a
sitting president to directly oppose the agenda of his own executive agency,
Covington noted that the appropriations approach could have some legs moving
forward.

“As we all know, federal appropriations bills are often
folded up together in very large packages, which could really impact Congress’s
and the president’s calculus on that approach,” Covington said. “And again,
this scenario only plays out if the DOL proposes a rule that would have the
same negative consequences as the original proposal. We’re still hopeful that
they will issue a rule that won’t have these problems.”

Covington concluded by observing there are “rumors” that the DOL may deal with some of the industry’s challenges to a stricter fiduciary standard by issuing a long list of prohibited transaction exemptions as part of the new rule, but Covington disputes the logic behind such an approach.

“We
don’t think the approach of making a strict rule and then issuing a long list
of exceptions would make any sense,” he said. “Why make somebody a fiduciary
and then immediately turn around and issue a prohibited transaction exemption
for them? What does that accomplish beyond complicating the system even
further? All the ERISA experts that we are in touch with say that it would be
next to impossible to effectively craft this kind of a rule in that way—relying
on a long list of complicated, detail prohibited transaction exemptions. We
don't believe it's a tenable approach.”